ASML (ASML) Q1 2023: €39B Backlog Anchors Capacity Ramp Despite Order Slowdown
ASML’s first quarter underscored the company’s ability to sustain outsized growth, supported by a nearly two-year system shipment backlog, even as new orders moderated. Management’s commitment to capacity expansion and disciplined capital allocation remains undeterred amid cyclical softness and geopolitical uncertainty. Visibility into 2024 and beyond is underpinned by secular drivers and robust customer roadmaps, with China’s mature node demand emerging as a critical buffer.
Summary
- Backlog Strength: €39B backlog shields near-term revenue and underwrites capacity investments.
- Geopolitical and Demand Mix: China’s mature node demand offsets advanced market volatility.
- 2024 Growth Visibility: Customer roadmaps and fab buildouts signal sustained shipment increases ahead.
Business Overview
ASML is the world’s leading supplier of photolithography systems, which are essential machines used in semiconductor manufacturing to pattern integrated circuits onto silicon wafers. The company generates revenue through the sale of advanced lithography systems—primarily EUV (Extreme Ultraviolet) and DPV (Deep Ultraviolet) tools—as well as through install base management (service and upgrades). Its business is segmented into system sales (EUV and DPV tools for logic and memory chipmakers) and services (maintenance, upgrades, and support).
Performance Analysis
ASML’s Q1 performance exceeded guidance on both revenue and gross margin, a result of faster-than-expected system installations and earlier customer acceptances, particularly in EUV and DPV. System sales dominated, with logic customers accounting for the majority, while memory demand remained subdued as customers managed inventories. Install base management revenue came in lighter due to lower upgrade activity, reflecting the industry’s current focus on cost discipline and utilization optimization.
Gross margin outperformance was driven by favorable product mix and higher emerging EUV/DPV revenue, more than offsetting the shortfall in upgrade services. Operating expenses remained contained, with R&D and SG&A both below guidance due to timing and currency effects. Net bookings of €3.8B moderated from prior quarters, as expected, but the company’s backlog of €39B—nearly double this year’s system sales—provides rare visibility and resilience in a cyclical market.
- Logic Versus Memory Split: 70% of system sales from logic, reflecting ongoing investment in advanced and mature nodes.
- China’s Share: Over 20% of backlog now allocated to Chinese customers, mainly for mature and mid-critical applications.
- Capacity Ramp: Plans to ship around 60 EUV and 375 DPV systems in 2023, with immersion tools making up a quarter of DPV output.
Cash and liquidity remain robust, with €6.7B on hand, supporting both dividends and share repurchases. The company’s capital intensity is elevated as it invests in future capacity and next-generation technology, but management signals this is a multi-year, strategic buildout.
Executive Commentary
"Our system's demand still exceeds our capacity for this year, albeit by a smaller margin than last quarter. ... We continue to expect a year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin."
Peter Winnick, CEO
"Bookings are lower than in previous quarters, which is not unexpected given the current environment, particularly taking into account our backlog at end of Q1 of around 39 billion euros, which is almost two times this year's system sales."
Roger Dawson, CFO
Strategic Positioning
1. Backlog as a Strategic Buffer
ASML’s €39B backlog provides rare multi-year visibility, allowing the company to maintain production and investment plans despite near-term order moderation. This backlog supports management’s confidence in both 2023 and 2024 growth, as much of next year’s demand is already secured or in advanced customer planning.
2. China’s Expanding Role in Mature Nodes
With over 20% of backlog and 45%–50% of DPV orders linked to Chinese customers, ASML is increasingly reliant on demand for mature and mid-critical nodes. This segment is driven by secular growth in automotive, energy transition, and industrial applications, and is largely insulated from advanced export controls. Management emphasizes the sustainability of this demand as China builds out domestic fab capacity.
3. Technology Roadmap Alignment
Customer commitment to advanced technology roadmaps remains firm, especially among leading-edge logic players. EUV intensity is expected to rise, with more EUV layers per chip and the introduction of high NA (numerical aperture) tools. The company’s capital allocation is focused on ramping high NA and expanding production for both advanced and mature systems.
4. Capital Allocation and Capacity Investments
ASML is executing a multi-year capacity expansion program, with capex expected at €2.4B in 2023 and sustained elevated levels through 2025. Investments target both high NA development and global manufacturing footprint, positioning the company to capture secular growth as new fabs come online worldwide.
5. Navigating Geopolitical and Regulatory Uncertainty
Export controls remain a headline risk, but management sees limited near-term financial impact as most affected products (advanced immersion tools) are a small portion of current shipments and Chinese customers are shifting to allowed nodes. The company is actively monitoring regulatory developments and adapting its product and market mix accordingly.
Key Considerations
ASML’s Q1 results highlight the company’s ability to balance cyclical softness with structural demand tailwinds, leveraging its backlog and technology leadership to sustain growth.
Key Considerations:
- Backlog-Driven Visibility: Nearly two years of shipment coverage allows for continued capacity ramp and investment even as order intake normalizes.
- China’s Demand as a Shock Absorber: Rapid buildout of mature node fabs in China is offsetting advanced market volatility and regulatory headwinds.
- Capital Intensity Commitment: Management is maintaining elevated capex for both high NA development and global capacity expansion, signaling confidence in long-term demand.
- Service Revenue Upside: Lower machine utilization in the short term could drive upgrade activity as customers prepare for a cyclical upturn, providing potential upside in install base management.
- Inflation Pass-Through: Progress on inflation compensation with large customers supports margin stability despite cost pressures.
Risks
ASML faces ongoing risks from export controls, cyclical demand swings, and customer inventory corrections. While management sees no material 2023 impact from new Dutch export rules, any escalation could affect future backlog composition, especially for advanced tools. Order moderation, if prolonged, could eventually pressure revenue beyond the current backlog window. Capital intensity and capacity expansion expose the company to execution risk if demand fails to materialize as expected.
Forward Outlook
For Q2 2023, ASML guided to:
- Net sales between €6.5B and €7.0B
- Gross margin between 50% and 51%
- Install base management sales of around €1.3B
- R&D expenses of approximately €990M and SG&A at €275M
For full-year 2023, management maintained guidance:
- Net sales growth of over 25% with a modest gross margin improvement
- EUV business growth of about 40% YoY, non-EUV growth around 30%, and install base management up 5%
Management cited continued strong backlog, ongoing fab construction, and customer technology transitions as drivers for sustained growth. Key watchpoints include the pace of order conversion for 2024 shipments and any changes in customer inventory or macro assumptions.
Takeaways
ASML’s unique backlog position and technology leadership provide rare visibility and resilience in a volatile semiconductor cycle.
- Backlog Shields Execution: The company’s €39B backlog allows it to ramp capacity and invest through cyclical uncertainty, supporting both near-term and multi-year growth.
- China’s Demand Mix Matters: Rapid expansion in China’s mature node segment is crucial for DPV demand and provides a buffer against advanced market volatility and export controls.
- 2024 and Beyond Hinges on Fab Buildout: Investors should track the pace of new fab construction, order conversion for late 2024 shipments, and the sustainability of China’s mature node demand as regulatory dynamics evolve.
Conclusion
ASML delivered a quarter that highlights the power of its backlog and the breadth of secular drivers supporting its business. The company’s strategic investments and disciplined execution position it to capture growth across advanced and mature nodes, with China’s demand providing critical support as the industry navigates cyclical and geopolitical headwinds.
Industry Read-Through
ASML’s results and commentary confirm that lithography remains a bottleneck and a growth driver for the semiconductor supply chain. The company’s backlog and capacity expansion signal continued investment across both leading-edge and mature nodes, with China’s domestic buildout reshaping global equipment flows. Export controls are accelerating the divergence between advanced and mature node demand, benefiting suppliers with broad product portfolios. For the broader industry, the persistence of secular demand drivers—EVs, AI, energy transition—means that capital equipment and materials suppliers with strong exposure to mature nodes and China are likely to see sustained demand, even as advanced market volatility persists.